Do you have a property portfolio with four or more properties? If so, you can:
- Lower the 40% Inheritance Tax Rate to 0%
- Decrease the 28% Capital Gains Tax to 0%
- Reduce Stamp Duty to nil
Our three-stage approach to professional landlord planning explained:
- Partnership (for at least 1 year)
If the properties are not held jointly with someone else, a partnership must be formed and formalised. It is recommended to run the partnership for a year when transferring assets from a partnership to a limited company without triggering a charge to Stamp Duty. This process is opposed to forming and liquidating within a few weeks, which is an approach adopted by a number of advisers, before incorporating.
Incorporation relief for Capital Gains Tax can be claimed if HMRC sees your properties as a business. s165 TCGA 1992 – Incorporating Relief says that:
More than four properties (excluding the main residence and foreign property).
The properties (however many there are) generate rental income of £25,000 gross p/a or more.
The partnership spends 10 hours a week or more dealing with the portfolio.
The partnership has an intention of purchasing/selling property in the near future or has recently bought/sold property in the past.
Upon demonstration of these factors, incorporation relief should be available, and no Capital Gains Tax will be paid. If there is a mortgage on the properties, we transfer the beneficial (equitable) interests in the properties into the company to avoid issues with mortgage lenders. When the NewCo issues shares, the company is deemed to have acquired the beneficial interests at today’s market value (meaning the historic gains are wiped out). This is one reason we recommend setting up a NewCo. The other reason is that it may well be ‘clearer cut’.
The accountant will white space the incorporation (we cannot get statutory pre-approval any more – HMRC won’t allow it). HMRC has twelve months to challenge the incorporation. Remember, everything is on our tax advisers’ professional indemnity insurance. If they think it can be done and are putting their professional indemnity insurance on the line, that must be seen as a positive belief in the advice being provided. Both advisers are chartered tax advisers and have worked for three out of the ‘Big Four‘ for a number of years.
After two years of running the company, the company sets up a specialist trust in accordance with s86 of the Inheritance Tax Act 1984. The company will benefit from special tax treatment (see below), provided that the trust is set up for the benefit of the company’s employees and their families (together with other stringent conditions). Some of the company’s shares are transferred into the trust (presumably from the NewCo or, if we have a holding/trading company structure, the holding company). The client and others chosen by the client will be the trustees who control the trust.
The ‘special’ tax treatment is:
No entry charge for Inheritance Tax.
Immediate Inheritance Tax relief (NOT the usual 7-year period).
No periodic charge for Inheritance Tax.
No exit charge for Inheritance Tax.
Professional landlord planning summary
Professional landlord planning makes it possible for the client’s portfolio to be free of Inheritance Tax in three years; without triggering any charges to Stamp Duty or Capital Gains Tax and without having to remortgage. Furthermore, mortgage interest relief can be claimed against Corporation Tax. The process takes three years.
Cost of professional landlord planning
We confirm costs in our free feasibility report. We cannot give an accurate figure without a full appraisal of an individual’s circumstances.
For more information or to book your consultation, please contact us here.